Amid slowing demand and economic uncertainty, residential developers are urging regulators to ease loan-to-value (LTV) rules, believing more flexible measures could revitalise the housing market, enhance affordability and propel an economic recovery.
The call comes as developers struggle with weakened domestic demand and increased borrowing costs, prompting concerns about long-term housing affordability and market stability.
Q: WHAT IS THE LTV RATIO AND WHY IS IT IMPORTANT?
LTV is a financial ratio that compares the loan amount to the appraised value of a property.
The Bank of Thailand uses LTV ratios as a prudential tool to safeguard financial stability and prevent overleveraging in the housing market.
By limiting how much buyers can borrow relative to the property's value, LTV rules aim to curb speculative activity and ensure that households do not become overburdened with debt.
Under current regulations, first-time homebuyers can secure loans of up to 100% for properties valued less than 10 million baht, and 90% for properties priced at 10 million baht or more.
Second-home buyers can borrow up to 90% for properties less than 10 million baht if they have made payments on their first mortgage for at least two years. The rate dips to 80% if the first mortgage has been paid for less than two years.
For buyers of third homes or more, the LTV is capped at 70% regardless of the property price.
These measures were introduced on April 1, 2019, and temporarily relaxed between Oct 20, 2021 and Dec 31, 2022 during the post-pandemic economy. The temporary relaxation proved highly effective in revitalising the residential market, according to developers.
However, from Jan 1, 2023, the central bank reinstated stricter LTV measures, suggesting there were emerging risks to financial stability from speculation in the real estate sector.
The economic recovery at the time was fragile, and financial institutions' credit underwriting standards remained cautious, according to the central bank.
Moreover, the reinstated ratio should not aggravate the household debt problem because only borrowers with strong financial positions who can take on higher debt will apply for mortgages, noted the regulator.
While these measures aim to encourage financial prudence, developers contend that stricter LTV rules disproportionately impact middle-income buyers, stifling the broader housing market and limiting access to affordable homeownership.
Q: WHY ARE DEVELOPERS CALLING FOR LOOSER LTV RULES?
Property developers believe loosening LTV restrictions would unlock purchasing power, particularly for second-home buyers and those seeking housing in higher price brackets.
They argue the current rules, implemented during the pre-pandemic years when the housing market was overheating, no longer align with the realities of a post-pandemic economy.
The pandemic left many households financially strained. High interest rates and stricter mortgage approval criteria have further compounded the challenges, making it difficult for buyers to secure financing.
Developers claim easing LTV rules would ease the financial burden for buyers and help revive demand in the housing sector.
Stricter LTV policies have contributed to high mortgage rejection rates, with many buyers unable to meet the down payment requirements.
According to industry reports, rejection rates average 30-40%, forcing some developers to offer flexible payment schemes to help buyers qualify for loans. Lowering LTV requirements would make homeownership more accessible, particularly for first-time buyers, according to developers.
Developers are also grappling with rising construction and land acquisition costs, which have driven up property prices. As affordability becomes a growing concern, they argue that looser LTV rules could help mitigate the impact by making it easier for buyers to secure financing for more expensive homes.
The housing sector is a key driver of the economy, contributing to job creation and investment, with developers claiming relaxed LTV restrictions would help the government stimulate economic growth and enhance consumer confidence.
"Reducing LTV restrictions would not only benefit the housing market, but also have a multiplier effect on other sectors, such as construction and consumer goods," said a representative of the Thai Real Estate Association.
Q: WHAT ARE THE RISKS OF LOOSENING LTV RULES?
While developers are optimistic about the benefits of relaxed LTV regulations, some economists caution that easing restrictions could lead to unintended consequences.
First, increased household debt could occur, and Thailand already has one of the highest household debt-to-GDP ratios in Asia, exceeding 90% in recent years.
Loosening LTV rules could encourage overleveraging by buyers, potentially exacerbating the country's debt problem.
The central bank is also concerned about speculation in the property market, and easing these regulations could reignite that trend, particularly in the condo segment, leading to price inflation and potential market bubbles.
There are risks for long-term financial stability as critics argue that LTV relaxation may provide only a short-term remedy. The central bank repeatedly emphasised the importance of balancing economic growth with financial prudence, warning against policies that prioritise immediate gains over sustainable development.
Q: WHAT ARE DEVELOPERS PROPOSING?
"Adjusting LTV policies for specific segments would strike a balance between stimulating the market and maintaining financial stability," said Pornarit Chounchaisit, president of the Thai Real Estate Association.
Rather than a complete removal of LTV regulations, developers are advocating for targeted adjustments. Some of their proposals include:
Setting higher LTV ratios for second homes, allowing buyers to secure loans worth 90-95% of the property value for second homes, up from the current ceiling of 70-90%.
Temporary relaxation for specific segments by implementing lenient LTV rules for mid-range properties priced between 2-5 million baht, which are most affected by the current economic conditions.
Providing additional incentives for first-time buyers, such as lower interest rates.
Q: WHAT HAPPENS NEXT?
The central bank has remained cautious in its response to calls for looser LTV rules. While acknowledging the challenges faced by the housing sector, it has reiterated the importance of maintaining financial discipline.
In recent months, the regulator has introduced targeted measures to support the economy, such as lowering interest rates and offering a debt restructuring programme, but has been mum on revising LTV regulations.
For developers, the stakes are high. With domestic demand weakening and international buyers yet to return in full force, they view LTV easing as a critical step towards reviving the housing market.
As the debate continues, all eyes are on the central bank to see whether it will heed the industry's calls or hold firm in its commitment to financial stability.
The discussion around LTV regulations highlights the delicate balancing act faced by policymakers and industry stakeholders in navigating the economic recovery.
For property developers, easing LTV restrictions represents an opportunity to unlock demand and stimulate growth.
However, the potential risks of increased debt and speculative activity cannot be overlooked.
As the country moves forward, finding a middle ground that addresses both short-term needs and long-term sustainability will be the key to ensuring the housing market's resilience in the years to come.
